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4000 - Advisory Opinions

Third-Party Seller of Certificate of Deposit is Insured When Insured Depository Institution Issuing Certificate Defaults Prior to Negotiation of Certificate to Buyer


October 15, 1990

Mark A. Mellon, Senior Attorney

This is in response to your letter of October 1, 1990 to Claude Rollin pertaining to federal deposit insurance. It is my understanding, based on your letter and our telephone conversation, that your firm trades negotiable certificates of deposit ("CDs"). When a CD is sold, there is a trade date, when the price and terms of the transaction are agreed upon, and a settlement date (usually several days after the trade date), when the purchaser pays for the CD and receives it. You wish to ascertain to whom the CD would be insured, the seller or the purchaser, in the event of default, subsequent to the trade date but prior to the settlement date, by the FDIC-insured depository institution which issued the CD.

To my knowledge, this is not a question for which the FDIC has previously provided an advisory opinion. The insurance regulations state, however, that if a deposit obligation of an insured depository institution is evidenced by an instrument such as a negotiable certificate of deposit, the FDIC will recognize the owner of the deposit obligation for all purposes of claim for insured deposits to the same extent as if the owner's interest were disclosed on the records of the insured institution; provided that the instrument was negotiated to the owner prior to the date of default of the institution. 12 C.F.R. §330.4(b)(4)(i). When an instrument is payable to order (as with the CDs in the instant matter), negotiation occurs with the delivery of the instrument. U.C.C. §3--202(1). Delivery with respect to an instrument is defined to mean voluntary transfer of possession. U.C.C. §1--201(14). You have stated in our telephone conversation that the purchaser of the CD will not receive the instrument until the settlement date. Based on this, it is my opinion that, in the event of default prior to settlement date, deposit insurance on a CD would go to the seller rather than the purchaser since the instrument has not been negotiated prior to default.

I hope that this letter is responsive to your inquiry. If you have any questions on this or any other matter, please do not hesitate to contact me.

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